2010 (12) TMI 34 - HC - Service Tax

Court upholds legality of service tax on construction activities involving sale of residential flats

GS. Promoters Versus UOI

The court dismissed the petition challenging the constitutionality of the explanation to Section 65(zzzh) of the Finance Act, 1994 and a related circular. ... Construction of complex – service tax on sale and purchase of flats – 65(105)(zzzh), 65(30a) and 65(91a) – Explanation inserted through Finance Act, 2010 – Constitutional validity – held: - contention that there is no element of service of construction involved in a builder selling a flat cannot be accepted. Whether or not service is involved has to be seen not only from the point of view of the builder but also from the point of view of the service recipient. What is sought to be taxed is service in relation to construction which is certainly involved even when construction is carried out or got carried out before construction and before flat is sold. the levy of tax is on service and not on service provider and construction services are certainly provided even when a constructed flat is sold. Taxing of such transaction is not outside the purview of the Union Legislature as the same does not fall in any of the taxing entries of State list. Issues:Challenge to the constitutionality of the explanation to Section 65(zzzh) of the Finance Act, 1994 and CBEC Circular No.334/3/2010-TRU dated 1.7.2010.Analysis:1. The petitioner sought a declaration that the explanation to Section 65(zzzh) of the Finance Act, 1994, and a related circular are unconstitutional. The petitioner, engaged in development and sale of residential flats, argued that the explanation widens the scope of levy beyond the concept of service by including sale, which is beyond the legislative competence of the Union Legislature.2. The statutory provisions define the construction of a complex, residential complex, and the explanation to Section 65(zzzh) which deems construction of a complex by a builder to be a service provided to the buyer. The petitioner contended that if construction activity is not undertaken by a builder, they should not be considered a service provider in relation to construction activities.3. The court referred to relevant case law and legal principles, emphasizing the economic concept of service tax and the legislative competence of the Union Legislature to levy taxes on services. It highlighted the need for a broad interpretation of legislative entries and discussed the distinction between the subject matter of a tax and the measure of tax.4. The court analyzed the scope of legislative powers and clarified that the impugned levy on construction services does not encroach on the State Legislature's powers related to the sale and purchase of goods. It distinguished between the taxation of sale, service, and composite transactions, citing relevant case law to support the legality of the service tax.5. Referring to a judgment of the Gauhati High Court, the court rejected the petitioner's argument that no construction service was rendered to the buyer in a transaction involving the sale of a flat. It concluded that the levy of tax is on the service provided, not the service provider, and that taxing such transactions falls within the purview of the Union Legislature.6. Ultimately, the court dismissed the petition, finding no grounds to declare the impugned levy unconstitutional. The judgment reaffirmed the legality of the service tax on construction activities involving the sale of residential flats.